The hidden costs of high rates and mortgage debt

Official figures suggest the Irish economy is driving on all cylinders but a look under the bonnet reveals a less reassuring picture in which higher-than-necessary interest rates and huge mortgage debt is holding back the potential of Irish SMEs and households.

The hidden costs of high rates and mortgage debt

By any measure the jobless rate has dropped sharply from over 15% at the peak of the banking and property crisis almost six years ago. After edging up in the month, the jobless rate currently stands at 6.4%, meaning that there are 141,100 people unemployed when seasonal factors are taken into account.

The monthly figures can only tell us part of the story, of course, and other factors that weigh on joblessness and employment, such as inward and outward migration, can only be guessed at.

Then there are the warnings implicit in the Government’s new measurement of economic output, GNI Star. Under this measure, Government gross debt is 106% of GNI Star. When measured against the current and unsatisfactory GDP measure of the Irish economy, the ratio is only 69%. To put that into perspective, under the former, the level of Irish sovereign debt is actually more elevated than Spain’s, while the latter is comparable to German debt levels.

Debt levels and debt servicing costs are issues that affect us all. They dictate the proportion of all taxes raised every year that will have to go to repaying the debt. It even dictates the amount of disposable income available to mortgage holders and also dictates the cost of financing all types of businesses across the economy.

If the Government decided to refinance all the debt that comes up for refinancing over the next few year at current rock bottom market rates, it could dramatically reduce the annual interest bill. The State could also spread out the amount to be repaid over longer periods taking pressure off cashflows for the next 10 years.

And in the case of mortgage holders, there is abundant evidence that home owners pay significantly higher rates than in the rest of the eurozone. Some sort of concerted Government effort to normalise the banking market would shift funds away from the banks back into the pockets of citizens would potentially boost the economy, if so required under a hard Brexit.

The costs for SMEs is another issue where Ireland is effectively imposing a tax on its own Irish firms. Again, SMEs are paying more than the average firm across the eurozone, a big issue because SMEs are still feeling the aftershocks of the financial crisis.

Almost a decade after the start of the crisis there remains a significant number of unresolved mortgages — which indirectly affects Irish businesses because it slows that part of the economy on which they depend.

The sale of loans to vulture funds by Irish banks, which were rescued by the taxpayer, has done enormous damage to the confidence of SMEs, in terms of their confidence in borrowing for growth.

While we want no repeat of the heavy borrowing and debts of the last crisis, businesses still require capital. Not to borrow even reasonable amounts will slow the recovery and consequently more of us become even more dependent on large companies and the multinationals.

It is, therefore, ludicrous to suggest that to prepare businesses for Brexit that Irish SMEs should increase exports to France and Germany, while at the same time subjecting them to higher borrowing costs than their competitors in those countries. Lower interest rates have not flowed to the people that need them most. And with the interest rates destined to rise over the next 18 months, we need to fix the problem soon.

High interest rates also contribute significantly to increasing the gaps in wealth, as well as adding to social problems. Failure to address this and other issues squeezes the lower and middle classes at the expense of the wealthy.

The Government needs to follow the money right along the chain and then do something about it.

John Finn is managing director at Treasury Solutions Limited

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